Last week, Professor Bainbridge raised several “questions for my fellow conservatives who support private [Social Security] accounts”. Here’s his key question:

2. If we can achieve significant savings and ensure the health of the system [by re-indexing benefits and by raising the retirement age] is there a non-ideological reason for introducing private accounts?

The next day he reported:

Curiously, even though I was explicitly seeking non-political explanations for Bush's reform proposals, most of the comments I've seen have involved concepts like freedom of choice rather than efficiency. Which worries me.

Let me see if I can clarify for him the benefits of Social Security choice. (Btw, I wouldn’t call myself a “fellow conservative,” but the label I would prefer isn't so important given that we're trying to be non-ideological here.) There are basically two major benefits:

1. The option to open a personal account (in place of payroll taxes and SS benefits) would give wider choice to the individual, enabling him to earn better returns on his retirement savings and to tailor his savings plan to his specific life-cycle situation and risk preferences. While Professor Bainbridge would be right to call this greater “freedom of choice,” it also means greater efficiency. We normally achieve greater efficiency (some gain, nobody loses; technically economists call it a “Pareto-improvement”) when we remove political restrictions on trade that keep an individual away from his preferred position. And we would do so here. There isn’t a conflict here between the two goals of more freedom and more efficiency.

Imagine a proposal to levy a new payroll tax to fund something (housing, clothing, medical care) that workers had previously bought for themselves. Imagine that almost all workers get less benefit per dollar than they had been getting, and that the one-size-fits-all nature of the program suits some workers particularly badly. The loss in efficiency is clear. Social security choice is an effort to undo, at least partially, a program of that sort.

2. Switching from an unfunded (pay-as-you-go or “Ponzi”) defined-benefit system to a funded defined-contribution system would dramatically increase real capital formation in the economy. By “real capital formation” I mean, retirement income would come from securities ultimately backed by machines and factories (corporate stocks and bonds) rather than from IOUs backed by nothing but claims on future taxpayers. (Martin Feldstein has made the point for years that Social Security has crowded out private savings and capital formation; he summarized it here.) Private accounts, were they widely adopted, would allow Americans in general to enjoy a higher standard of living. Perhaps this is the kind of efficiency gain Professor B. seeks?

Professor Bainbridge adds:

Even proponents of private accounts concede that the transition costs will require trillions of dollars of government borrowing. Do we conservatives really want revenge on FDR and the New Deal at that price? Personally, speaking as a small government fiscal conservative kind of guy, I'd give up personal accounts if any money thereby saved was spent on deficit reduction or, better yet, an income tax rate cut.

The good professor is simply confused about the "price" of personal accounts here. As even opponents of private accounts concede, the proposed move to personal accounts, with workers who opt-in paying an appropriate price in reduced benefits, is self-financing. It will require borrowing, yes, but it will not require additional taxes or benefit cuts to repay the transitional debt. The debt will be repaid with the cash freed up by the voluntary benefit reductions for those who opt in. Conversely, giving up the Bush proposal for personal accounts will not make a single dollar available for deficit reduction or an income tax rate cut.